SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
X ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2010
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______ to ___________.
Commission file number 0-29651
USA VIDEO INTERACTIVE CORP.
(Exact name of registrant as specified in its charter)
(State or Other Jurisidiction of
(I.R.S. Employer Identification No.)
Incorporation of Organization)
1224 Mill Street-Bldg B Suite 117, East Berlin, Connecticut
(Address of principal executive offices)
Registrants telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant as required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x.
State the aggregate market value of the voting and non-voting equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed fiscal quarter: $3,831,927
Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date: 191,596,364
Documents Incorporated by Reference: NONE
TABLE OF CONTENTS
Unresolved Staff Comments
Submission of Matters to a Vote of Security Holders
Market for Registrations Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Managements Discussion and Analysis of Financial Condition and
Results of Operation
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and
Controls and Procedures
Directors and Executive Officers of the Registrant
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Statements in this annual report on Form 10-K that are not historical facts constitute forward-looking statements which are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industrys actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Those factors include, among other things, those listed under Risk Factors and elsewhere in this annual report. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expects, plans, anticipates, believes, estimates, predicts, potential’’ or ‘‘continue’’ or the negative of these terms or other comparable terminology; as well as terms such as “we intend to continue to develop and expand our StreamHQ™ services business, “upon successfully licensing our patent”, and “our future plans include the marketing and selling of our StreamHQ™ systems”.
These statements are only predictions. Actual events or results may differ materially. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this annual report to conform these statements to actual results. References herein to we, us, and the Company are to USA Video Interactive, Corp.
We design and market to business customers digital watermarking, streaming video and video-on-demand systems, services and source-to-destination digital media delivery solutions that allow live or recorded digitized and compressed video to be transmitted through Internet, intranet, satellite or wireless connectivity. Our systems, services and delivery solutions include digital watermark solutions and video content production, content encoding, media asset management, media and application hosting, multi-mode content distribution, transaction data capture and reporting, e-commerce, specialized engineering services, and Internet streaming hardware.
Although we have generated nominal sales for the 2010 year, we continue to explore opportunities that will result in new products for new revenue streams, but there can be no assurances that such efforts will be successful.
Our products and services are based on our proprietary rich media delivery infrastructure and software and our Store and Forward Video-on-Demand ("VOD") patent. Our patent expired in February of 2010. These technologies, together with video compression technology, facilitate the delivery of video to an end user in a timely and interactive fashion.
We have developed a number of specific products and services based on these technologies. These include MediaSentinel™ and SmartMarks™, a process that watermarks digital video content; StreamHQ™, a collection of source-to-destination media delivery services marketed to businesses; EncodeHQ™, a service that digitizes and compresses analog-source video; hardware server and encoder system applications under the brand name Hurricane Mediacaster™; ZMail™, a service that delivers web and rich media content to targeted audiences, and mediaClix™, a service that delivers content similar to Zmail™ but originating from an existing web presence.
Our company was incorporated on April 18, 1986, as “First Commercial Financial Group Inc.” in the Province of Alberta, Canada. In 1989, our name was changed to Micron Metals Canada Corp., which purchased 100% of the outstanding shares of USA Video Inc., a Texas corporation, in order to focus on the digital media business. In 1995, we changed our name to USA Video Interactive Corp. and continued our corporate existence to the State of Wyoming. We have one wholly-owned subsidiary: USVO Inc. In the last four months of 2010 we dissolved: USA Video (California) Corp., USA Video Corporation, Old Lyme Productions Inc. and USA Video Technology Corporation. USA Video's executive and corporate offices are located in East Berlin, Connecticut, and our Canadian offices are located in Vancouver, British Columbia.
The cost of bandwidth and supporting equipment, such as cable modems and other broadband connectivity to homes and businesses, is expected to continue to decrease over the next several years, bringing expanded use of high bandwidth applications for video transmission to the general market. Meanwhile, compression technologies continue to improve, allowing delivery of higher quality content using existing connectivity. Also, digital content piracy is increasing at an exponential rate.
We believe that the expected substantial increases in bandwidth capacity, accompanying decreases in bandwidth cost, increases in consumer computer and video appliance storage capacity, and the proliferation of fast video file transfer techniques will result in an industry focus on downloading as an alternative to streaming as a content delivery mechanism. To position ourselves to take advantage of this anticipated shift, protecting our technology ownership rights, including pursuing licensing arrangements and other forms of enforcement and pursuing marketing of our patent-pending digital watermarking technology.
We continue to research and develop our patent-pending digital watermarking technology while pursuing marketing of our new releases of MediaSentinel™ and other related products.
We discontinued the sale of select services from our prototype StreamHQTM after customers' satisfaction and proof of concept. We no longer sell our individual functions of StreamHQTM. We intend to continue to develop and expand our StreamHQ™ services business, while pursuing opportunities to sell replicated StreamHQ™ systems to corporations and organizations that prefer systems solutions to services solutions.
Our proprietary technologies include our (1) Digital watermarking piracy deterrence technology; (2) StreamHQ™ infrastructure, software, and service delivery processes, and (3) VOD patent (expired in February 2010).
The objective of our patent-pending Digital Watermarking technology is to deter digital video piracy once a user has been authorized to view a video. This is one of the major concerns preventing content owners from committing more of their content to the digital medium. Digital watermarking helps trace content to incidents of piracy, thus deterring piracy.
The ability of StreamHQ™ to deliver services to clients with market-specific value propositions stems from its scalable, streaming-enabled web infrastructure, the software functionality that resides on this infrastructure (such as innovative asset management and user transaction data capture and reporting), and the processes developed for delivering media campaigns to clients. By delivering features unique to individual markets, such as advertising, corporate communications and customer service, StreamHQ™ services are differentiated from the generic services delivered by competitors.
Our VOD Patent (US #5,130,792) (the "Patent") as well as patents we have obtained in other countries explicitly covers the rich media delivery model that is becoming more widely accepted as a means of delivering content for education, training, and entertainment; that is, faster-than-real-time download to computer and set-top box hard drives for subsequent content viewing without quality limitations resulting from insufficient or variable bandwidth. The impact of this Patent becomes more significant as content owners and those that facilitate content delivery adopt this model. Our Patent expired in February 2010.
Products and Services
Our principal products and services are our proprietary Digital Watermarking technology. These technologies, together with video compression technology, facilitate the delivery of video to end users with piracy deterring Digital Watermarks.
We have developed a number of specific products and services based on these technologies. These include:
MediaSentinel™, digital watermarking technology used to deter piracy of digital content;
SmartMarks™, are invisible, unremovable, forensic “digital watermarks” imbedded in every video frame to protect digital video from piracy.
We propose to grant licenses to use our patent-pending digital watermarking technology on terms comparable to the reasonable royalty provided for by U.S. patent laws. Upon successfully licensing our patent, we could earn an initial licensing fee and/or per-use royalties, meaning that each time a licensed event occurs (e.g. each time a digital watermark is encoded in a video) a specified royalty will be paid to us. Upon suitable negotiated terms, we may also consider bulk-fee licensing agreements, either apart from or in addition to per-use royalties.
Our future plans include the marketing and selling of our StreamHQ™ systems, whereby a customer would purchase an entire system, comprised of hardware assembled by us and software developed and installed by us. After sale and delivery of the system to a customer, our service to the customer would then include updates of software and service and maintenance of hardware, as necessary, for additional compensation. The services of Zmail™ and mediaClix™ are available to a customer only through the purchase of a StreamHQ™ system.
As a cost cutting measure, we have terminated the operation of our StreamHQTM infrastructure, which provided individual functionality of StreamHQTM for small customers, as this service was no longer cost effective or deemed necessary at this time.
Status of Products and Services
We are taking aggressive steps to advance our patent-pending digital watermarking technology. These steps include actively seeking licensing initiatives. Our product is designed to be easily customized to individual customer needs.
We have recognized a rising need for anti piracy applications, which we developed under the brand MediaSentinel™”. MediaSentinel™ utilizes SmartMarks™ which are digitally encoded forensic data invisibly embedded into a video stream. Currently, research and development is focused on our MediaSentinel™ products. The current release of MediaSentinel™ is designed for the motion picture industry.
Customers and Markets
The principal market for our services is the business-to-business sector, rather than the individual consumer sector. The market for digital watermarking technology may be required by copyright-owning content providers who have concerns about the potential for digital piracy of their material. Protocols may develop which will require participants in the video industry to embrace some form of digital watermarking. We will follow those developments closely, and, if necessary, take steps to promote and protect our digital watermarking technology.
Additionally, companies within the business-to-business sector, rather than the individual consumer, generally possess the greater financial wherewithal and purpose for purchasing StreamHQ™ systems. Our focus is on companies that can benefit from an engaging rich media and web presentation directed at a target audience. Our customers for these services have included film companies, event promoters, ministries, travel companies, sports entertainment centers and political candidates.
Our customers for StreamHQ™ systems may also be businesses or organizations that are dissatisfied with response rates from traditional email campaigns, or who have in the past been unable to track the response rate to such traditional email campaigns. Additionally, any business that wishes to increase brand or product awareness in a more cost effective manner than television advertising would be an appropriate candidate for the StreamHQ™ services.
Sources and Availability of Raw Materials
We assemble our hardware systems from components manufactured by others. We specify, procure, assemble, test and deploy the various system components according to a precisely developed set of procedures. We consult on an as-needed basis, with companies that supply the major materials needed to build our systems. Systems are programmed and configured to meet a wide variety of individual customer requirements.
We procure the materials and hardware to assemble systems and their components from various companies, as needed, and in sufficient quantities to preclude any danger of significant sourcing problems in the immediate future. There are no seasonal limitations on our operations.
AquaMobile, Civolution, Verance, Verimatrix and other companies large and small are active in the field of digital watermark technologies. The video streaming market is currently dominated by a small number of larger companies, including Real Networks, Microsoft, Yahoo and several others, some of which offer source-to-destination streaming media solutions. Most of our current and potential competitors have longer operating histories, larger customer bases, greater name recognition and significantly greater financial, marketing and other resources than us. In addition, larger, well-established and well-financed entities may acquire, invest in or form joint ventures with online competitors as the use of the Internet and other online services increases. In addition, new technologies and the expansion of existing technologies are expected to result in additional competition.
The streaming media market is new, rapidly evolving and extremely competitive and we expect that competition will intensify in the future. We compete with other companies that provide all or certain aspects of our services, including other streaming media providers, content encoders, video production companies, Internet data management companies, and others, and expect that additional competition in the future will be provided by those types of providers. Our current market share is insignificant.
We are, and will continue to be dependent on vendors and other providers to supply the hardware, software and co-location resources that comprise our products and services. Further, we currently compete with, and expect to compete with in the future, providers of some of our technology or system components. Competition is expected in all areas of business, including pricing, service, product performance, and our ability to keep up with rapidly improving technology, changing market conditions, evolving industry standards and changing customer demands.
Research and Development
Prior to 1999, we conducted seven years of research and development of our proprietary VOD technology. In 1999, our focus shifted to marketing and sales of our products and services, with research and development directed primarily at supporting sales and development of Wavelet compression technology. In 2000, we devoted substantial resources to development of our StreamHQ™ services and began development of our proprietary still and motion Wavelet technology, which has been completed as mathematical processes. In 2001, we redirected the Wavelet development effort toward the invention of a content protection technology that is grounded in similar science as Wavelet compression. The result is our patent pending digital watermark technology for piracy deterrence. During 2002, as a result of cost cutting measures necessitated by the state of the market, we cut back on our marketing, sales and technical staff. In 2004, we resumed development of our patent pending digital watermark technology.
During fiscal 2010 and 2009, our research and development expenditures were $3,300 and $36,000, respectively.
Our success is dependent, in part, upon our proprietary technology. We generally rely upon patents, trademarks, and trade secret laws to establish and maintain our proprietary rights in our technology products and services.
On June 19, 2001, United States Patent Application No. 09/884,787, Method and Apparatus for Digitally Fingerprinting Videos, was officially filed with the U.S. Patent and Trademark Office. This patent is for MediaSentinel™”.
As of March 31st, 2011, we employed four people, including our two senior executive officers, one technology and one administrative employee. We consider the relationships with our employees to be good.
Competition for technical personnel in the industry that we compete in is intense. Our future success will depend,
in part, on our continued ability to contract or hire, assimilate, and retain qualified personnel. To date, we believe we have been successful in recruiting qualified contractors or employees, but there is no assurance that we will continue to do so in the future.
Our business and operations are subject to a number of risks and uncertainties as described below. However, the risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become important factors that harm our business, financial condition or results of operations. If any of the following risks actually occur, our business, financial condition or results of operations could suffer.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS.
We have a very limited operating history and have made very limited sales of our products and services and we were in the development stage through December 31, 1999. Our business and prospects must be considered in light of the risks encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as digital watermarking. Some of these risks relate to our ability to:
maintain or develop relationships with suppliers and marketing partners;
establish a customer base;
continue to develop and upgrade our technology, products and services;
provide superior customer service;
respond to competitive developments; and
retain and motivate qualified personnel.
WE HAVE INCURRED SUBSTANTIAL LOSSES; WE EXPECT TO INCUR LOSSES IN THE FUTURE, AND MAY NEVER ACHIEVE PROFITABILITY.
we have not been profitable, have not generated significant revenue from operations, and have incurred substantial losses. For the year ended December 31, 2010 we had a net loss of $89,175. As of December 31, 2010, we had an accumulated deficit of $39,085,276 and a working capital deficit of $447,586. We intend to continue to expend significant financial and management resources on the development of our proposed products and services, and other aspects of our business. As a result, we expect operating losses and negative cash flows to increase for the foreseeable future. Consequently, we will need to generate significant revenues to achieve and maintain profitability. We may be unable to do so. If our revenues grow more slowly than anticipated or if operating expenses increase more than expected, or are not reduced sufficiently, we may never achieve profitability. Because of factors discussed in this paragraph, our auditors, in their report on our financial statements, have expressed substantial doubt concerning our ability to continue as a going concern.
IF WE ARE UNABLE TO OBTAIN SUBSTANTIAL ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO REMAIN IN BUSINESS.
We require substantial working capital to fund our business. We have had significant operating losses and negative cash flow from operations since inception of our current business and expect to continue to do so for the foreseeable future. Our capital requirements will depend on several factors, including the rate of market acceptance of our products and services, the ability to establish and expand a client base and the growth and effectiveness of our sales and marketing efforts. We estimate we will require approximately $1.25 Million to $1.75 Million in financing to meet our working capital needs over the remainder of 2011 and substantial additional financing thereafter. Further, if capital requirements vary materially from those currently planned, we may require additional financing. We have no arrangements or commitments for any financing. Financing may not be available when needed on terms favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to further develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures, or ultimately, to continue in business.
OUR OPERATING RESULTS IN FUTURE PERIODS ARE EXPECTED TO BE SUBJECT TO SIGNIFICANT FLUCTUATIONS, WHICH WOULD LIKELY AFFECT THE TRADING PRICE OF OUR COMMON SHARES.
Our quarterly and annual operating results are likely to fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. Some of these factors include:
our ability to attract and retain customers;
the introduction of new enhancements in digital watermarking;
our ability to remain competitive in our product and service offerings;
our ability to attract new personnel; and
U.S. and foreign regulations relating to the Internet.
As a result of the factors listed above, and others, period-to-period comparisons of our operating results may not be meaningful in predicting our future performance. It is possible that our operating results will not meet market expectations in some future quarter or quarters, which would likely result in a significant decline in our stock price.
THE DIGITAL WATERMARKING BUSINESS IS HIGHLY COMPETITIVE, AND OUR FAILURE TO COMPETE SUCCESSFULLY WOULD LIMIT OUR ABILITY TO RETAIN AND INCREASE OUR MARKET SHARE.
The digital watermarking market is new, rapidly evolving and extremely competitive. We expect competition to intensify in the future. We compete with companies that provide all or certain aspects of our services, including other streaming media providers, content encoders, video production companies, Internet data management companies, and others, and expect that additional competition in the future will be provided by those types of providers and others. Our current market share is insignificant.
The digital watermarking market is currently dominated by a small number of larger companies, including Civolution, Verance, Verimatrix and other companies large and small, some of which offer digital watermarking products. Most of our current and potential competitors have longer operating histories, larger customer bases, greater name recognition and significantly greater financial, marketing and other resources than us. In addition, larger, well-established and well-financed entities may acquire, invest in or form joint ventures with online competitors as the use of the Internet and other online services increases. In addition, new technologies and the expansion of existing technologies are expected to result in additional competition.
We may not be able to compete successfully against current and future competitors, and any inability to do so could decrease our revenues, contribute to our not achieving profitability and adversely affect our ability to establish, maintain and increase our market share.
THE MARKET FOR OUR PRODUCTS AND SERVICES IS RELATIVELY NEW AND IS EVOLVING, AND OUR SUCCESS WILL DEPEND ON OUR ABILITY TO ADAPT TO CHANGING MARKET CONDITIONS.
Our future financial performance will depend in large part on the growth in demand for our digital watermarking services and products. This market is emerging and rapidly evolving, is characterized by an increasing number of market entrants and will be subject to frequent and continuing changes in customer preferences and technology. As is typical in new and evolving markets, demand and market acceptance for our products and services is subject to a high level of uncertainty. Because the market for our products is evolving, it is difficult to assess or predict
with any assurance the size or growth rate, if any, of this market. There can be no assurance that a significant market for our products will develop, or that it will develop at an acceptable rate or that new competitors will not enter the market. In addition, even if a significant market develops for such products, there can be no assurance that our products will be successful in such a market. If a significant market fails to develop, develops more slowly than expected or attracts new competitors, or if our products do not achieve market acceptance, our business prospects, financial condition and results of operations will be materially adversely affected.
WE ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, WHICH COULD RENDER OUR PRODUCTS AND SERVICES OBSOLETE.
Our future success will depend in part on our ability to offer products and services that incorporate leading technology and address the increasingly sophisticated and varied needs of our current and prospective customers. Our market is characterized by rapidly changing and unproven technology, evolving industry standards, changes in customer needs, emerging competition and frequent new service introductions. Future advances in technology may not be beneficial to or compatible with our business. In addition, we may not be able to incorporate technological advances into our products and services in a cost-effective and timely basis. Keeping pace with the technological advances may require substantial expenditures and lead time, particularly with respect to acquiring updated hardware and infrastructure components of our systems. We may require additional financing to fund such acquisitions. Any such financing may not be available on commercially reasonably terms, if at all, when needed.
WE ARE DEPENDENT UPON VENDORS AND OTHER THIRD PARTY SERVICE PROVIDERS, AND WILL BE COMPETING WITH SOME OF THESE COMPANIES.
We are, and will continue to be dependent on vendors and other providers to supply the hardware, software and co-location resources that comprise our products and services. We have no long-term or exclusive contracts or arrangements with any of these vendors or providers. We cannot be certain that our current and proposed vendors and service providers will continue to do business with us or that we will be able to establish relationships with new vendors and service providers, if necessary. If we are unable to establish and maintain satisfactory relationships and arrangements with these third parties, our business could be harmed. In addition, we will be dependent upon our third party vendors and other suppliers to adequately test their products before release, and to provide support for the products after delivery. The failure of any of these third party providers to do so could have a material adverse effect on our business.
Further, we currently compete with, and expect to compete with in the future, providers of some of our technology or system components. Our inability to, at the same time, effectively cooperate and compete with these companies could harm our business.
IF WE DO NOT CONTINUOUSLY IMPROVE OUR TECHNOLOGY IN A TIMELY MANNER, OUR PRODUCTS COULD BE RENDERED OBSOLETE.
The markets for our products and services are characterized by:
rapidly changing technology;
evolving industry standards;
frequent new product and service introductions; and
changing customer demands.
These changes and developments may render our products and technologies obsolete in the future. As a result, our success depends on our ability to adapt to these changes, particularly to develop or adapt products and services or to acquire new products and services that can compete successfully. There can be no assurance that we will be successful in these efforts.
OUR SERVICES ARE COMPLEX AND WE MAY NOT BE ABLE TO PREVENT DEFECTS THAT COULD DECREASE THEIR MARKET ACCEPTANCE, RESULT IN PRODUCT LIABILITY OR HARM OUR REPUTATION.
Our digital water marketing and streaming media products and services are complex, and the steps we take to ensure that they are free of errors or defects, particularly when first introduced or when new versions or enhancements are released, may not be successful. We cannot guarantee that current versions or enhanced versions or our products will be free of significant software defects or bugs. Despite our testing, and testing by our third-party vendors and providers, current or future products may contain serious defects. Serious defects or errors could result in lost revenue or a delay in market acceptance of our products and could seriously harm our business and operating results. Errors in our products may be caused by defects in third-party hardware or software incorporated into our products. If so, we may be unable to fix these defects without the co-operation of these third-party providers. Because these defects may not be as significant to these providers as they are to us, we may not receive the rapid co-operation that we may require. Errors, defects or other performance problems with our products could also harm our customers' businesses or result in potential product liability claims. Even if unsuccessful, a product liability claim brought against us would likely be time-consuming, costly and harmful to our reputation. Nor can there be any assurance that our product liability insurance coverage will be sufficient to satisfy any successful claim.
ANY LOSS OF OUR PERSONNEL OR INABILITY TO ADD NEW PERSONNEL COULD HARM OUR BUSINESS.
Our future success depends significantly on the continued services and performance of our senior management. Our performance also depends on our ability to retain and motivate our other key personnel. The loss of the services of any member of our senior management team or other key employees could cause significant disruption in our business. We have no long-term employment agreements with senior management and do not currently maintain any "key person" life insurance. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, operations, sales and marketing and customer service personnel. Competition for such personnel is intense, and we may not successfully attract, assimilate or retain sufficiently qualified personnel. The failure to retain and attract the necessary personnel could impede our future success.
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS. AS A RESULT, CURRENT AND POTENTIAL STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH COULD HAVE A NEGATIVE IMPACT ON OUR STOCK PRICE.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our Annual Report on Form 10-K our assessment of the effectiveness of our internal controls over financial reporting. Our Chief Executive Officer and Chief Financial Officer have determined that our internal controls are ineffective. The material weaknesses in our internal controls related to a lack of segregation of duties due to inadequate staffing within our accounting department and upper management, the assignment of authority and responsibility, lack of consistent policies and procedures, inadequate monitoring controls and inadequate disclosure controls. If we cannot adequately maintain the effectiveness of our internal controls over financial reporting, we may be subject to liability and/or sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. Any such action could adversely affect our financial results and the market price of our common stock.
WE DO NOT CURRENTLY HAVE ANY PAYING CUSTOMERS.
Our sales were $39,070 in 2010 and $48,000 in 2009. One customer accounted for 100% of our revenue for the years ended December 31, 2010 and 2009. We expect a small number of customers will continue to account for a substantial portion of our revenue for the foreseeable future. Our inability to increase the number of our customers could limit our ability to maintain or increase our market share, or could cause revenue to drop quickly and unexpectedly.
OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY.
We seek to protect our proprietary rights through a combination of patents, trade secrets and trademark laws, confidentiality procedures and contractual provisions with employees and third parties. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we consider as proprietary. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Any litigation could result in substantial costs and diversion of management and other resources with no assurance of success and could seriously harm our business and operating results.
OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, CAUSING US TO INCUR SIGNIFICANT COSTS OR PREVENT US FROM LICENSING OUR PRODUCTS.
Other companies, including our competitors, may have or obtain patents or other proprietary rights that would prevent, limit or interfere with our ability to make, use or license our products. We cannot be certain that our products do not and will not infringe patents or other proprietary rights of others. We may be subject to legal proceedings, including claims of alleged infringement by others of the intellectual property rights of third parties. If a successful claim of infringement is brought against us and we fail to or are unable to license the infringed technology on commercially reasonable terms, our business and operating results could be significantly harmed. Companies in the technology market are increasingly bringing suits alleging infringement of their proprietary rights, particularly patent rights. Although we are not currently subject to any litigation or claims, any future claims, whether or not valid, could result in substantial costs and diversion of resources with no assurance of success. Intellectual property litigation or claims could force us to do one or more of the following:
cease selling, incorporating or using products or services that incorporate the challenged intellectual property;
obtain a license from the holder of the infringed intellectual property right, which license may not be available on commercially reasonable terms, or at all; or
redesign our products or services.
If we are forced to take any of these actions, our business could be substantially harmed.
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH IN DEMAND FOR E-BUSINESS APPLICATIONS.
Our primary business strategy involves the development of products and services that enable users to transmit video over the Internet. As a result, our future sales and any future profits will be substantially dependent upon the widespread acceptance and use of the Internet as an effective medium of business by consumers and businesses. To be successful, consumers and businesses that historically have used traditional means of commerce to transact business must continue to accept and utilize the Internet as a medium for conducting business and exchanging information. Consumers and businesses may reject the Internet as a viable commercial medium for a number of reasons, including potentially inadequate network infrastructure, slow development of enabling technologies, insufficient commercial support and privacy concerns. In addition, delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity or increased government regulation could cause the Internet to lose its viability as a commercial medium. If the demand for e-business applications does not grow or grows more slowly than expected, demand for our products and services would be reduced and our revenue would suffer.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS AND RISKS TO DOING BUSINESS ON THE INTERNET.
We are not currently subject to direct regulation by any governmental agency, other than regulations applicable to businesses generally, export control laws and laws or regulations directly applicable to electronic commerce. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet covering issues such as: user privacy, pricing, content, copyrights, distribution, and characteristics and quality of products and services.
Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business.
The applicability to the Internet of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, export or import matters, obscenity and personal privacy is uncertain. The vast majority of such laws were adopted prior to the advent of the Internet and related technologies. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes to such laws intended to address these issues, including some recently proposed changes, could create uncertainty in the Internet marketplace. Such uncertainty could reduce demand for our products and services or increase the cost of doing business due to increased costs of litigation or increased service delivery costs.
OUR SHARE PRICE HAS BEEN AND COULD BE HIGHLY VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES TO INVESTORS.
The trading price of our common shares has been and is likely to continue to be highly volatile and could be subject to wide fluctuations in response to a number of factors including: variations in quarterly operating results; new products or services offered by us or our competitors; conditions or trends in the Internet and online commerce industries; changes in the economic performance and/or market valuations of other Internet and online service companies; and other events or factors, many of which are beyond our control. In addition, the stock market in general, and the market for Internet-related and technology companies in particular, has experienced extreme price and volume fluctuations, including large price drops in 2010, 2009, 2008, 2003, 2002 and 2001, that have often been unrelated or disproportionate to the operating performance of such companies. These broad market and industry factors may materially adversely affect the market price of our common shares, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against such companies. Such litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS COULD PREVENT OR DELAY A CHANGE IN CONTROL OF THE COMPANY.
Our Articles of Continuance and bylaws contain anti-takeover provisions that could discourage, delay or even prevent an acquisition of our company at a premium price or at all. Any of these provisions might prevent the market price of our common shares from increasing in response to takeover attempts, and could prevent our shareholders from realizing a premium over the then-prevailing market price for the common shares.
WE INTEND TO ISSUE ADDITIONAL EQUITY SECURITIES, WHICH MAY DILUTE THE INTERESTS OF CURRENT SHAREHOLDERS OR CARRY RIGHTS OR PREFERENCES SENIOR TO THE COMMON SHARES.
We intend to issue additional equity securities in order to raise working capital. Accordingly, existing shareholders may experience additional dilution of their percentage ownership interest in our company. In addition, the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common shares.
LIMITED LIABILITY OF EXECUTIVE OFFICERS AND DIRECTORS MAY DISCOURAGE SHAREHOLDERS FROM BRINGING A LAWSUIT AGAINST THEM.
Our bylaws contain provisions that limit the liability of directors for monetary damages and provide for indemnification of officers and directors. These provisions may discourage shareholders from bringing a lawsuit against officers and directors for breaches of fiduciary duty and may also reduce the likelihood of derivative litigation against officers and directors even though such action, if successful, might otherwise have benefited the shareholders. In addition, a shareholder's investment in USA Video may be adversely affected to the extent that costs of settlement and damage awards against officers or directors are paid by USA Video pursuant to the
indemnification provisions of the bylaws.
REQUIREMENTS OF THE SEC WITH REGARD TO LOW-PRICED "PENNY STOCKS" MAY ADVERSELY AFFECT THE ABILITY OF SHAREHOLDERS TO SELL THEIR SHARES IN THE SECONDARY MARKET.
"Penny stocks" are low-priced, and usually highly speculative, stock selling at less than $5.00 per share. Our securities are subject to Rule 15g-9 under the Securities Exchange Act of 1934, which imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and "accredited investors" (generally, an individual with a net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The rule also requires the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer must also disclose the commissions payable for the transaction, current quotations for the stock, and, if applicable, the fact that it is the sole market maker in the stock. Consequently, the rule may adversely affect the ability of broker-dealers to sell our securities and may adversely affect the ability of shareholders to sell their shares in the secondary market.
WE DO NOT ANTICIPATE PAYING DIVIDENDS TO SHAREHOLDERS IN THE FORESEEABLE FUTURE.
We have not paid dividends on our common shares and we intend, for the foreseeable future, to invest any earnings in the further development of our business. Accordingly, shareholders should not expect to receive any dividends on their shares.
Our failure to manage or adequately address any one or more of these rights could result in our business suffering a material adverse effect.
Unresolved Staff Comments.
Our headquarters and executive offices are located in East Berlin, Connecticut consisting of 144 square feet with a month to month lease. The annual base rent is $1,590.
We also lease 800 square feet of office space located in Vancouver, British Columbia, on a month-to-month lease. The annual base rent is $20,000.
Our patent infringement litigation (filed by a our subsidiary that was dissolved in September 2010) against Movielink LLC came to a substantive conclusion on September 8, 2006, when the U.S. Court of Appeals for the Federal Circuit affirmed certain rulings of the U.S. District Court for the District of Delaware granting Movielink summary judgment of non-infringement. A further procedural determination was entered on September 26, 2007, taxing litigation costs against us.
On September 13, 2006, USA Video Technology Corp., our wholly-owned subsidiary, filed suit in the U.S. District Court for the Eastern District of Texas, alleging that its U.S. Patent No. 5,130,792 is infringed by cable technology interests including Time Warner, Inc., Charter Communications, Inc., and Comcast Cable Communications LLC, and seeking statutory compensation and a court injunction against further infringement. In December 2007, the court issued rulings adverse to our interests: a claim construction ruling interpreting certain terms in the patent's claims, and a related summary judgment of non-infringement. Defendants then filed motions for costs and attorney fees. The court denied defendants' motions for attorney fees and granted the motions for costs, so that we now have a remaining liability from this litigation in the amount of approximately $30,000, not counting our own remaining attorney fees and litigation expenses. Our subsidiary filed notice of appeal from the
district court's adverse substantive decisions, but was unable to prosecute the appeal and so it was dismissed. USA Video Technology Corp has reported $30,000 accounts payable as of December 31, 2009. . USA Video Technology Corp was been dissolved and the previous record payable has been written off in 2010.
Subsequent to the year end the Company and its former subsidiary Old Lyme Production, Inc (dissolved) was served with a notice of claim in the amount of $30,000. The Company was not party to the contract nor a guarantor. Management believes this claim is without merit and plans to vigorously defend this claim.
Submission of Matters to a Vote of Security Holders.
Market for Registrant's Common Equity and Related Stockholder Matters.
There is a limited public market for our common shares. Our common shares trade on the TSX Venture Exchange (the TSX) under the trading symbol "US", and on the NASD OTC Bulletin Board under the symbol "USVO".
The following table shows the high and low sales prices (in Canadian dollars) of our common shares as reported by the TSX for the periods indicated.
TSX (Symbol US)
First Quarter 2009
Second Quarter 2009
Third Quarter 2009
Fourth Quarter 2009
First Quarter 2010
Second Quarter 2010
Third Quarter 2010
Fourth Quarter 2010
The following table shows the high and low prices of our common shares on the NASD OTC Bulletin Board. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
OTC Bulletin Board (Symbol USVO)
First Quarter 2009
Second Quarter 2009
Third Quarter 2009
Fourth Quarter 2009
First Quarter 2010
Second Quarter 2010
Third Quarter 2010
Fourth Quarter 2010
As of March 31st 2011 there were 191,596,364 common shares outstanding, held by 1,288 shareholders of record.
To date, we have not paid any dividends on our common shares and do not expect to declare or pay any dividends on such common shares in the foreseeable future. Payment of any dividends will depend upon future earnings, if any, our financial condition, and other factors as deemed relevant by our Board of Directors.
All sales of securities made by us during the year ended December 31, 2010 that were not registered under the Securities Act have been disclosed in our report on Form 10-Q for the periods ended March 31, 2010June 30, 2019and September 30, 2019or in this Form 10-K. The sales did not involve the use of an underwriter and no commissions were paid in connection with the sale of any of these securities.
Selected Financial Data.
The following table presents selected historical financial data. The consolidated statement of operations data for the years ended December 31, 2009 and 2010 and the balance sheet data as of December 31, 2009 and 2010 are derived from our consolidated financial statements included elsewhere in this report, which have been audited by John A. Braden , P.C., independent auditors for fiscal 2009 and Killman, Murrell & Company P.C. for 2009. The selected financial data should be read in conjunction with our consolidated financial statements, including the related notes, and the information in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Management's Discussion and Analysis of Financial Conditions and Results of Operation.
You should read the following discussion and analysis of our financial condition and results of operations together with Selected Consolidated Financial Data and our consolidated financial statements and related notes appearing elsewhere in this annual report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under Risk Factors and elsewhere in this annual report on Form 10-K.
We were a development-stage company from January 1, 1992 to December 31, 1999, during which time we engaged primarily in the development of our end-to-end hardware systems and proprietary Video-on-Demand and Wavelet compression technologies, and had very limited sales. In 2000, we made the first of our end-to-end systems, and invested heavily in further development of our StreamHQ™ streaming media system. Due to current market conditions, management has implemented consolidation procedures to reduce the expense of operations. We have transitioned our wavelet compression technology into a digital watermark technology.
As more fully discussed below we have not been profitable, and our revenues for 2010 were $39,070. We cannot predict our revenue levels for the next 12 months, or thereafter, nor when, or if, our operations will become profitable. We will require additional financing, both for the remainder of fiscal 2011 and thereafter, to continue to operate and expand our business. There is no assurance that such financing will be available on commercially reasonable terms, if at all.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to customer programs and incentives, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, impairment or disposal of long-lived assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the policies below as critical to our business operations and to the understanding of our financial results. The impact and any associated risks related to these policies on our business operations is discussed throughout managements discussion and analysis of financial condition and results of operations where such policies affect our reported and expected financial results:
Impairment or disposal of long-lived assets;
Accounting for stock-based compensation; and
Commitments and contingencies.
REVENUE RECOGNITION. Revenue is recognized for digital water marking based on a contracted usage schedule on a monthly billing cycle. Software revenue and other services are recognized in accordance with the terms of the specific agreement, which is generally upon delivery and when accepted by customer. Maintenance, support and service revenue are recognized ratably over the term of the related agreement. In order to recognize revenue, we must not have any continuing obligations and it must also be probable that we will collect the accounts receivable.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Long-lived assets are reviewed in accordance with ASC Topic 360-10-05. Impairment or disposal of long-lived assets losses are recognized in the period the impairment or disposal occurs.
DEFERRED TAXES. We record a valuation allowance to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized.
ACCOUNTING FOR STOCK-BASED COMPENSATION. Under ASC Topic 718, Stock Compensation (formerly referred to as SFAS No. 123(R)), the Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense attributed is based on estimated forfeiture rate, which is updated based on actual forfeitures as appropriate. This option pricing model requires the input of highly subjective assumptions, including the expected volatility of the Companys common stock, pre-vesting forfeiture rate and an options expected life. The financial statements include amounts that are based on the Companys best estimates and judgments.
COMMITMENTS AND CONTINGENCIES. We account for commitments and contingencies in accordance with financial accounting standards board Statement No. 5, Accounting for Contingencies. We record a liability for commitments and contingencies when the amount is both probable and reasonably estimable.
Results of Operations
Revenues for the year ended December 31, 2010 ("fiscal 2010") were $39,070 and for the year ended December 31, 2009 ("fiscal 2009) were $48,000. All revenues for fiscal 2010 and 2009 were derived from a license agreement for digital watermarking. We had one customer, which accounted for 100% of the revenue in both years.
Total operating expenses for fiscal 2010 were $259,735, compared with $858,978 for fiscal 2009. For fiscal 2010, cost of sales were $5,860, as compared with $10,050 for fiscal 2009.
Non-cash compensation charges for fiscal 2010 were $-0- and for fiscal 2009 were $264,525, due mostly to issuance of common shares and share purchase warrants to our officers, directors and employees at a price or exercise price below the market price of the common shares at the time of issuance and the issuance of stock options to contractors due to our adoption of FASB 123R effective as of January 1, 2006. Because the rules of the TSX allow that the offering price for privately placed securities of listed companies may be set at the market price when the offering is first announced, rather than upon closing, the sale price of the common shares and the
exercise price of the warrants were below the market price of the common shares on the date of issuance. In 2006 fair value of employee stock options for employees are included in non-cash compensation which is included in selling, general, and administrative expenses in the statement of operations.
Our management and employee agreed to fifty percent (50%) reduction of salaries and fees in the first quarter of fiscal 2010 and no wages in the second, third and fourth quarters of fiscal 2010. Product marketing costs decreased due to managements decision to direct our efforts toward the current customer in additional divisions. Professional fees decreased due expiration of our patent in February 2010. Administrative expenses have decreased as a result.
During the period ended December 31, 2010 in connection with the dissolution of the subsidiaries, we wrote off accounts payable obligations of approximately $136,000 and recorded a gain of $136,000, due to the fact that the parent company was not responsible for the subsidiaries' liabilities.
Fiscal 2010 versus fiscal 2009
Research and development expenses consisted primarily of contractors, compensation, hardware, software, licensing fees, and new product applications for our proprietary MediaSentinel™. Research and development expenses decreased to $3,300 for fiscal 2010, from $35,965 for the comparable period in fiscal 2009.
Selling, general and administrative expenses were $250,575 for fiscal 2010, as compared to $812,963 for fiscal 2009. Selling, general and administrative expenses consisted of marketing expenses, consulting fees, noncash compensation, office, professional fees, and other expenses to execute our business plan and for day-to-day operations. The primary components of the decreases from fiscal 2010 to fiscal 2009 were:
a $46,137 decrease in fiscal 2010 in marketing expenses was due to managements decision to direct our efforts toward the current customer in additional divisions and reduction in marketing salaries; and
a $215,250 decrease in salaries and fees in fiscal 2010 was due to management and employee reduction; and
a $9,712 decrease in fiscal 2010 in transfer agent fees was due to decreased activity for stock transfer.
a $264,525 decrease in fiscal 2010 in non-cash compensation charges due to no issuance of options or private placements.
To date, we have not achieved profitability and expect to incur substantial losses for the foreseeable future. Our net loss for fiscal 2010 was $89,175, compared with a net loss of $811,004 for fiscal 2009.
Liquidity and Capital Resources
At December 31, 2010 our cash position was $5,254, a increase of $4,489 from December 31, 2009. We had a working capital deficit of $447,586 and an accumulated deficit of $39,085,276 at December 31, 2010.
Our principal source of cash during fiscal 2010 as proceeds of $138,150 received from the exercise of stock warrants. This was offset by $133,661 of cash used in operating activities.
We have historically satisfied our capital needs primarily by issuing equity securities to our officers, directors, employees and a small group of investors, and from short-term bridge loans from members of management. During fiscal 2010 officers, directors, employees and a small group of investors exercised warrants, resulting in gross proceeds to us of $138,150.
Our independent registered public accounting firm, in their report accompanying our audited financial statements at and for the year ended December 31, 2010, have stated that there is substantial doubt about our ability to continue as a going concern. As of December 31, 2010, we had $5,254 in cash. We will require an additional $1.25 million to $1.75 million to finance operations for the fiscal 2011 and we intend to obtain such financing
through sales of our equity securities. The threat to our ability to continue as a going concern will be removed only when revenues have reached a level that sustains our business operations.
Assuming the aforementioned $1.25 million to $1.75 million in financing is obtained, continuing operations for the longer-term will be supported through anticipated growth in revenues and through additional sales of our securities. Although longer-term financing requirements may vary depending upon our sales performance, management expects that we will require additional financing of $2.0 million to $3.0 million for fiscal 2012. We have no binding commitments or arrangements for additional financing, and there is no assurance that management will be able to obtain any additional financing on terms acceptable to us, if at all.
Off-Balance Sheet Arrangements
As of fiscal 2010 we have no off-balance sheet arrangements.
Quantitative and Qualitative Disclosure About Market Risk.
We believe our exposure to overall foreign currency risk is not material. We do not manage or maintain market risk sensitive instruments for trading or other purposes and we are not exposed to the effects of interest rate fluctuations as we do not carry any long-term debt.
We report our operations in US dollars and our currency exposure, although considered by us as immaterial, is primarily between US and Canadian dollars. Exposure to other currency risks is also not material as international transactions are settled in US dollars. Any future financing undertaken by us will be denominated in US dollars. As we increase our marketing efforts, the related expenses will be primarily in US dollars. In addition, 90% of our bank deposits are maintained in U.S. dollars.
Financial Statements and Supplementary Data.
The financial statements and supplementary financial information required to be filed under this item are presented on pages F-1 through F-21 of this Report and are incorporated herein by reference.